Let’s Go to Court!

A call to news organizations: Join Bloomberg's suit vs. Fed

There will time later to assess who’s ahead and who’s behind in the coverage of the financial crisis and the unprecedented scandal it represents, but for now it is important for all news organizations to put aside their rivalries and do one thing: Join the Bloomberg lawsuit.

On Friday, Bloomberg LP, in the finest traditions of American investigative reporting, sued the Federal Reserve Board’s governors for public records that would answer two simple questions: Who is receiving $2 trillion in Fed loans and what kind of collateral are taxpayers getting to support them?

No, that’s not a typo. That’s trillion, with a “t.”

And, yes, as hard as it is to believe, taxpayers don’t know the identity of the borrowers to whom they are lending. They also don’t know what kind of junk—stocks? CDOs? Three milk cows and a ’69 Camaro?—they’re getting to support the federal loans.

A PDF of the suit is here. Business news organizations should file amicus briefs or otherwise help out.

As Bloomberg wrote yesterday in another hard-hitting and useful bailout report:

Nov. 10 (Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Unbelievable. But true!

Listen, one can argue about whether the Fed’s loan program is wise or not, though most people think it is.

But it seems beyond argument, now that the Treasury’s vaults have been thrown open, that taxpayers should know who is getting these loans. Likewise, it is axiomatic that taxpayers should be able to see the collateral, especially given the virtual certainty it will be worth far less than the cash they are lending. The taxpayers’ exposure here is enormous.

For those of you just joining the transparency party, just a couple of words of background: The $2 trillion in loans discussed in the Bloomberg story and the subject of its suit are separate and apart from the $700 billion bailout, also known as the Troubled Asset Relief Program, passed by Congress in October. That bailout at least has some measure of transparency—one knows at least which banks are getting capital—and safeguards to ensure that taxpayers’ investment is secured.

The Fed lending program is different. As the Bloomberg suit explains, before August 2007 the Fed typically loaned money to regular banks for very short periods of time, requiring gold-leaf collateral, and had about $1 million in loans outstanding at any one time. Come the financial crisis, the Fed added three new lending programs and dramatically eased terms and dropped collateral standards, opening the loan spigot. By the first week of October, the Fed had average lending of more than $400 billion. Now, of course, the figure is much higher.

One hears quite often that such numbers are unprecedented, and it is all too true.

In return, banks handed over collateral of unknown, and one can only assume, poor quality. The gap between amount loaned and the amount the collateral is worth is the amount the taxpayers may have to pay if banks can’t make good on these loans.

As the Bloomberg suit says:

The government documents that Bloomberg seeks are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression. The effect of that crisis on that American public has been and will continue to be devastating. Hundreds of corporations are announcing layoffs in response to to the crisis and the economy was the top issue for many Americans in the recent elections.

Here are more excerpts from the Bloomberg suit with my emphasis. Note how basic the information is that Bloomberg is seeking:

In response to the crisis, the Fed has vastly expanded its lending programs to private financial institutions. To obtain access to the public money and to safeguard the taxpayers’ interests, borrowers are required to post collateral. Despite the manifest public interest in such matters, however, none of the programs themselves make reference to any public disclosure of the posted collateral or of the Fed’s methods of valuing it. Thus, while the taxpayers are the ultimate counterparty for the collateral, they have not been given any information regarding the kind of collateral received, how it was valued, or by whom.

Seems pretty clear to me.

Here are some of the documents Bloomberg is requesting. Emphasis is added, again, to show how basic this information is.

Records to sufficient to show the names of the Relevant Securities…

Records sufficient to show the amount of borrowing permitted as compared to the face value [the non-marked-down value of the collateral], also known as the ‘haircut…’

Records sufficient to describe whether valuations or ‘haircuts’ for the Relevant Securities changed over time [i.e. whether taxpayer losses are growing]…

Records sufficient to show the terms of the loans and the rates that the borrowers must pay…

Records, including contracts with outside entities, that show the employees or entities being used to price the relevant securities and to conduct” the lending process.

Who’s running the program? A simple question.

There are arguments against disclosure, of course, but the secrecy case here seems especially weak.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”

Barney Frank gives it a try, and comes across sounding foolish. Here’s what he says about the loans the banks:

“I talk to [New York Fed Chairman Tim] Geithner and he was pretty sure that they’re OK,” said Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

Pretty sure they’re okay? And here’s the argument for secrecy:

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be problematic.

Actually, it’s more likely that visibility would help the market, as Bloomberg’s story points out:

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

“I’d love to hear the methodology, how the Fed priced the assets,” D’Vari said. “That would unclog the market very quickly.”

The fear for banks is misplaced. They already have the loans, so they’re fine. The real purpose of secrecy is hiding how badly—not banks—but taxpayers are in the hole.

From the Bloomberg suit:

The public has significant and legitimate interest in the Fed’s conduct with respect for these four lending facilities because the Fed’s assets are public assets. Taxpayers are entitled to understand and assets the decisions by the Fed on the valuation of the collateral it accepts as security for public money being lent to private institutions. The public’s interest is particularly pronounced in light of the new expansive powers of the Fed, the new risks that the Fed is taking with public money, and the ongoing financial crisis and its effects on the American economy.

As the public’s independent eyes and ears on the government, news organizations, can do no less than everything in their power to put a spotlight on these public expenditures. The power to tax and spend is probably government’s most basic one. Watching those, to me, is a news organization’s first order of business. It is Job One.

Freedom of Information Act requests are a commonplace newsgathering tool, and so, for that matter, are lawsuits to force disclosure when the law is violated. The Bloomberg suit is a reasonable, appropriate and measured tactic by a mainstream news organization. And the suit is manifestly in the public interest.

News organizations compete, but from time to time they cooperate on matters of press freedom and transparency. This is one of those times.

The suit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

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